More than a decade of falling interest rates has hammered pension, endowment and foundation portfolios. But no group of institutional investors has been hit harder by shrinking investment options than global insurers, which manage $24.4 trillion in assets, according to the latest annual fund management report by TheCityUK, a London-based financial services trade organization.
Insurance companies juggle a complex set of conflicting demands from policyholders, shareholders, regulators and rating agencies; their onerous capital requirements dont help, either. They long played it safe by building portfolios almost entirely from traditional fixed-income investments like government and corporate bonds.
Since the credit crisis of 2008 and 2009, though, insurers have turned to alternative-asset managers to help boost returns. In response to growing demand, those managers have launched specialty divisions that cater to insurers. New outsourced insurance asset management mandates rose from $43.2 billion in 2007 to $110.2 billion in 2009 and were still above precrisis levels last year at $71.1 billion, according to Louisville, Kentuckybased management consulting firm Eager, Davis & Holmes. In April, Goldman Sachs Asset Managements New Yorkbased insurance asset management division, which oversees $131 billion, released a survey of 252 insurance company CIOs and CFOs. It found that by the end of 2012, assets outsourced by survey participants had reached $6 trillion, or 25 percent of the industry total. Fully 85 percent of insurers polled outsourced part of their assets, and more than 40 percent of CIOs said they planned to increase overall portfolio risk this year.
Outsourcing insurance assets is nothing new. Pre-2008, when yields were still high, some insurers farmed out mandates for U.S. investment-grade corporate bonds to reduce costs. Postcrisis the focus shifted to yield enhancement. Insurance companies now use outsourcing primarily to gain access to a wider variety of asset classes, explains Robert Goodman, head of insurance relationships at GSAM. Insurers alternative assets range from bank loans, real estate, commercial property and private equity to emerging-markets debt and equities, high-yield debt and even hedge funds and global infrastructure such as roads and bridges.
Our clients are reaching out to us for more advice, says David Lomas, New Yorkbased head of asset manager BlackRocks global financial institutions group, which invests $313 billion in insurance assets. The industry is evolving into a much more diverse asset pool. Lately, Lomas has been recommending that insurance clients avoid duration risk the sensitivity of a bonds price to changes in interest rates and embrace the illiquidity risk that comes with not being able to quickly sell an asset like private equity or infrastructure.
In 2011 property/casualty insurers held 6 percent of their total assets in public equity, 2 percent in real estate, 2 percent in private equity and 1 percent in hedge funds, according to GSAM estimates based on data mined from business intelligence firm SNL Financial. As modest as that appears, life insurers had just 1 percent in public equity, 1.5 percent in real estate, 2 percent in private equity and 0.3 percent in hedge funds. The percentages may be small, but in a $24 trillion market, those dollar amounts are anything but.
For insurers necessity is inspiring creativity. Were seeing a lot of interest, inquiries and pleas: How can you help us get out of this box? says Gregory Staples, Deutsche Banks New Yorkbased co-head of portfolio management for fixed-income solutions, who helps manage $200 billion in insurance assets. Other moves to increase returns include using dividend tilts high-dividend-paying stocks and more real estate investment trusts and direct real estate, Staples adds.
Douglas Niemann, head of insurance strategies and analytics at J.P. Morgan Asset Management in New York, points out that besides adding new assets, the insurance industry is developing new attributes of existing fixed-income securities, such as private market credit. Given that correlations among asset classes have returned to historical levels, its more important than ever to have the right manager, Niemann says. Idiosyncratic management is crucial because not all risky assets are the same, he asserts. Its really an opportune time for insurers to take a look at allocations to hedge funds and private equity investments.